As an increasing number of Britons look to retire abroad Sarah Albury outlines the issues they need to consider if they are not to fall foul of inheritance tax rules
Currently 5.5 million Britons live abroad and it is anticipated that a further million will leave the country by 2011. If this trend continues (and a recent survey revealed that nearly half of Britons would rather spend their retirement abroad) three million pensioners will have left by 2050.
This so called "silver flight" offers a unique opportunity to those UK intermediaries advising in this area to help their clients to start planning now so that their present hope to retire abroad can become their future reality.
There are many aspects to this planning. Intending emigres tend to focus, for example, on mortgage selection, tax-efficient investment, pension planning and health insurance, all of which are obviously extremely important.
However, one aspect of retiring abroad that is often overlooked is ensuring that proper advice is taken as to the succession laws and inheritance taxes that could apply to a person's estate if they retire and then die owning property abroad.
The most popular countries to which Britons have historically retired have been Spain, France, New Zealand, Australia and the United States of America. This trend seems set to continue although as more countries join the EU, the range of available options will expand accordingly.
Often the appeal of these new member states is the affordability of property there and the reasonable cost of living compared to our own but not all of these countries currently have sophisticated legal systems or experience in dealing with foreign nationals owning property there. Each of these countries does in fact have its own legal system and the complexities of how this interacts with ours can cause real problems.
Cross-border estates - succession
When you live in one country and own property in another, you have what is referred to as a "cross-border estate" and it will be necessary to decide which law of succession will apply to the assets within it.
In English law, succession to what is known as moveable property (e.g. chattels, cash) is governed by the law of the deceased's domicile at death. Succession to immoveable property (e.g. land) is governed by the law of the country in which the property is situated.
However, other countries apply different rules, for example some provide that the succession law of the deceased's nationality or habitual residence at death shall apply to the whole of his estate at death. It is often extremely complicated to work out which country's rules are to apply in situations where the deceased died resident in one country but was domiciled in another and possibly owning property in a third.
Because of the different rules in different countries it is also sometimes unclear just what actually comprises the estate. For example, certain jurisdictions do not recognise joint tenancies or do not recognise trusts or consider matrimonial property as automatically communal or joint.
Then there is the spectre of "forced heirship rules" to contend with in countries such as France. While in the UK we are used to having no restrictions at all upon who we leave our estate to via our will. In civil law systems there are rules of forced heirship which dictate that part of an estate may not be freely disposed of by the deceased. Often these rules will mean that a part of the estate must pass to particular relatives regardless of what any will may say. In today's society where divorce, remarriage and children from successive relationships are commonplace, such provisions can often leave a widow, in particular, in the very delicate position of having to share ownership of her (foreign) home with her late husband's children from his first marriage.
Forced heirship rules can also provide that lifetime gifts of assets up to 30 years earlier are to be clawed-back if a compulsory heir is not provided for by will.
It is therefore essential to know how the law of the country to which a client wishes to retire, will apply to assets owned there so that there are no nasty surprises later on or, more vitally, planning can be undertaken at the time of acquisition so as to ensure that the property passes to those the client would wish to receive it.
Although it is not always possible to totally overcome forced heirship rules via a will, it is often advisable to have more than one will, one in England & Wales and another in the country in which clients retire and/or own land. This can have practical advantages (to which reference will be made below) but more importantly perhaps, can offer a mechanism via which the client can correct any imbalance caused by the operation of forced heirship rules as they will apply to his estate, by making an appropriate compensatory provision in his English will.
When no planning has been done, it is inevitable that problems will occur when the deceased dies owning assets in different countries. The "probate" process must be completed in each country. The grant of representation to the estate (or equivalent in the appropriate jurisdiction) will have to be obtained first in the home jurisdiction and then in each jurisdiction in which there are assets. This can lead to financial difficulties and delays in administering the estate. Meanwhile, as the family are unlikely to be free to deal with the assets in each country until the process is complete, it may not be possible to deal with the assets at the best time and losses could result.
To overcome this practical difficulty it is again often advisable that clients have more than one will. As most English wills contain at least one trust this can cause enormous problems when trying to "probate" an English form will in a European "civil code" country where the concept of "trusts" is alien. A will in local form may be more suitable.
There are also real logistical advantages to having more than one will. The will for each jurisdiction can be "probated" or the administration of the estate in each country started independently and without delay, for example, for the grant of probate to issue here.
However, great care needs to be taken by the will draftsman in each country that they do not inadvertently revoke the other will(s) and it is therefore essential that the lawyers in each jurisdiction liaise with each other. This will also be vital so as to ensure that any will intended to cover foreign assets complies with local legal requirements such as being in the client's own handwriting or the need for the document to be notarised. Even if there is to be only one will it should always be checked with local lawyers to ensure that the document is in a form acceptable under local laws and is capable of dealing with assets in that jurisdiction.
A local lawyer will also be able to explain to clients who may be familiar with the probate process in the UK, the estate administration process in their jurisdiction. A grant of probate is not something that is understood in civil law jurisdictions where title to assets passes directly to the heirs whose responsibility it is to complete the legal and fiscal formalities.
Cross-border estates - inheritance tax
Any Briton aiming to retire abroad will also need expert advice as to the tax consequences of his doing so. While living abroad (or even while still living here but owning property abroad), the client will need to fully understand his exposure to wealth taxes, income tax and property taxes.
Moving abroad may not be sufficient to enable the client to shed his UK domicile (should he wish to do so) and he will need specialist advice as to his tax residence and domicile status.
On death, if the client remains domiciled in the UK, his worldwide estate will remain subject to UK inheritance tax. Estate or succession tax in the foreign country in which property is owned is normally charged on immovable property in that country. The UK will generally give a tax credit for any foreign tax paid. A foreign domiciliary will be subject to UK inheritance tax on UK situated immoveable property.
The administration of a cross-border estate is more complex and, needless to say, expensive. Even if this additional complexity and expense cannot be totally avoided, those planning to retire abroad need to be advised that such difficulties exist so as to enable them to take such measures as they can to lessen the problems left behind for their heirs to deal with. Ideally the client should seek professional advice before purchasing a property abroad so that potential problems and pitfalls can be avoided.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress